Persistently high portfolio growth, increasing average loan sizes and stagnating client numbers for the last decade have raised concerns of overheating in the Cambodian microfinance market, and whether there is an over-indebtedness crisis around the corner.

Data from the Credit Bureau of Cambodia (CBC) reveals that 50% of loans disbursed in 2017 were for refinancing, with 25% refinanced earlier than maturity and 30% refinanced at over 130% of the original loan amount.

To better promote a healthy microfinance sector, protect vulnerable clients and avert a crisis, Incofin’s East Asia office worked with international development finance institutions ADA, BIO, FMO and PROPARCO to initiate a pioneering self-regulatory initiative with the Cambodia Microfinance Association (CMA). “The Lending Guidelines Project is a pro-active, self-regulatory initiative aimed at managing risks in the sector. It is very important that as responsible operators, we join and implement this to ensure a sustainable future for the microfinance sector,” says Kea Borann, Chairman of the CMA.

The Lending Guidelines Project commenced in December 2016 with CMA members signing an MOU agreeing to implement a set of responsible lending guidelines intended to reduce the risk of over-indebtedness. The CMA took another important step in May 2018 when its members agreed to set a threshold for “high-risk” loans at 5% of total monthly disbursements. Implementation should be complete by year’s end, and have a significant impact since CMA members represent 80%+ of the MFIs operating in Cambodia.

KPI “dashboards” help monitor CMA member compliance with Project guidelines. The dashboards were created by development finance expert Daniel Rozas, and are generated by the CBC using monthly data submitted by MFIs.

According to Sok Voeun, Chairman of the CMA’s CEO Taskforce: “The LGs dashboard is an effective tool to monitor the implementation of the best lending practices that could reduce the risk of market overheating and a potential over-indebtedness crisis. In addition, the LGs dashboards puts the high risk MFIs on notice. We will continue to encourage other responsible financial institutions who are not CMA members to adopt the LGs.”

The LGs dashboard is a powerful and dynamic risk management tool for all internal and external MFI stakeholders. “The LGs dashboard is a valuable, quantitative gauge for me to evaluate my investees’ lending behaviours and allows me to engage with them in a more constructive dialogue on risk“, says Dannet Liv, Senior Investment Manager at Incofin East Asia Office.